Modigliani and Miller (MM) assumed that firms pay out all their earnings as dividends. Therefore, they theorized that firms do not grow. Firms do grow, however, and as capital structure theory advanced, an extension to the MM model with taxes was developed that incorporated growth.
1. The MM Model extended for growth includes a growing tax shield - True or False?
2. In the MM extension with growth model, rsU is used as the discount rate for the tax shield - True or False?
3. Using the MM extension for growth, a growing firm's levered cost of equity is less than the levered cost of equity under MM's original (with tax) assumptions - True or False?
4. Using the MM extension for growth, a growing firm's WACC is greater than the WACC under MM's orignal (with tax) assumptions - True or False?